Profit from a Market Pull Back

The stock market is clearly over bought and it keeps going up. Earnings and the promise of benefits from the tax overhaul are driving many sectors. Bulls keep buying and bears warn of a stock market correction. Interestingly, CNBC writes that for the market to keep going up it needs to pull back first.

The stock market posted one of its best weeks in over a year and all the major averages hit records.

However, let’s be honest: those who are looking for this rally to continue nicely through the rest of the first quarter should be hoping for a pullback right here.

That’s right – a pullback at this juncture would help the market digest its recent gains and work off stocks’ overbought condition, which will actually give it a better chance of rallying further in the future.

Stock traders make their money on short term market movement instead of investing for long term growth. And a short term correction followed by higher stock prices could result in profits two times for a smart trader. The two ways to take advantage of this scenario are fundamental and technical analysis. The fundamentals are clear in that stock prices are at historic highs. Where traders will profit is from reading technical signals of both a correction and a recovery. Another approach is to use stock options to hedge risk and lock in opportunity for both up and down markets.

How to profit from stock option trades is to develop, improve, and trade with an options strategy. It is common to see the expression options strategy bandied about on the internet. But, what is a stock option strategy? It is defined method of approaching options, analyzing options and their underlying equities, and buying or selling both puts and calls.

If you think the market will keep going up you will buy call options and if you think it will correct you will buy put options. A call option gives you the right to buy a stock at a set price even if the market price goes up. A put allows you to sell at a set price even when the market price falls. If you simply cannot decide which way the market is going to go an alternative as described on our sister site, Options-Trading-Education.com is to use a long straddle.

A long straddle is buying both a call and a put on the same stock with the same expiration date. In a long straddle options strategy the worst a trader can do is lose the cost of the premiums paid for the call and put if the stock does not change price. However, this options trading strategy has potentially unlimited potential if the stock price changes significantly either up or down.

Considering that both the bulls and bears have good arguments about a continued rally and for at least a short term correction, options allow you to limit risk to the price of an option contract and a strategy such as the long straddle let you position yourself to take advantage of market movement in both directions.

Disclaimer: Trading and investing involves significant financial risk and is not suitable for everyone. No content on this website should be considered as financial, trading, or investing advice. All information is intended for educational purposes only.